Should Greenspan have stopped the housing bubble?

I recently overheard someone bashing Alan Greenspan for not doing something about the subprime mortgage market. That something seemed a little fuzzy, but seemed to involve stopping banks from offering those dreadful, dreadful loans.

This seems to be a fairly common sentiment, so I think it's worth pointing out that the latest data we have shows that the overwhelming majority of subprime loans are still in good standing. Subprime securities are taking a bath because defaults are higher than were expected, not because everyone who got one is in trouble. The 85% of homeowners with subprime loans who are currently making their payments might not agree that Alan Greenspan should have, in his ineffable wisdom, prevented them from getting loans.

Nor, so far, is there much evidence that the subprime problems are causing much fuss in the broader financial markets. So it's far from clear to me that Alan Greenspan should have acted--and indeed, far from clear to me that Alan Greenspan could have acted effectively.

There's a disturbing tendency to think that every problem is the result of inadequate regulation. In fact, America's bank industry is, as Tyler Cowen points out, one of the most heavily regulated in the world. And not every problem can be solved by better regulation--some things simply can't be regulated without causing bigger problems than they solve. There is no perfect regulatory state that will allow us all to live in a serene economic paradise, and the sooner we stop looking for one, the more effective our regulatory state will actually be.

Update In calmer consideration, that was too flip. But the financial holocaust that was widely feared has not come to pass, and is looking less likely to occur with each passing day.

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